Should Taxes Change Your Asset Allocation?

Should you factor taxes into your asset allocation? A viewer asked whether money in a Roth should count for more than money in a traditional IRA, since the Roth has no tax waiting on it. In this video I give you my take, and I show you the other side.

I start with a simple example: $1 million, half in a Roth invested in stocks and half in a traditional IRA invested in bonds. On the surface, that's a 50/50 portfolio. Assume a 22% tax rate, and the IRA is worth about $390,000 after tax. That makes the mix about 56% stocks and 44% bonds.

I'm not a fan of an after-tax asset allocation, for two reasons. First, it's far more complicated than it looks. You'd need to know when you'll take the money out, how much, and what the tax laws will be then. Some of the IRA may go to charity or to your children. And what about taxable accounts?

Second, income tax is just another bill. We pay real estate taxes, personal property taxes, car insurance and utilities out of the same money, and we don't factor those into our asset allocation.

Then I show you the case for it, from the Bogleheads wiki and from William Reichenstein, who has written extensively on the idea. Their core point is true: a dollar in a traditional IRA is worth less than a dollar in a Roth. I've linked both below so you can read the other side.

Where I land: money is fungible. It all goes into one checking account to pay the bills. So I keep it simple.

Resources mentioned in the video:

Tax-adjusted asset allocation (Bogleheads wiki): https://www.bogleheads.org/wiki/Tax-adjusted_asset_allocation
Reichenstein's 2001 article (Journal of Wealth Management): https://www.efficientfrontier.com/ef/704/REICHENSTEINJWMMarkOpt.pdf
Reichenstein's 2006 paper (Financial Analysts Journal): https://rpc.cfainstitute.org/research/financial-analysts-journal/2006/after-tax-asset-allocation

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0:00 Should taxes change your asset allocation?
0:16 A viewer's question: is a Roth dollar worth more?
0:45 My take
1:01 A 50/50 portfolio, before and after tax
1:43 Why it's more complicated than it looks
2:42 Taxes are just another bill
4:07 The case for it: the Bogleheads
4:55 William Reichenstein's research
5:27 Where I land: money is fungible

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While still working as a trial attorney in the securities field, I started writing about personal finance and investing In 2007. In 2013 I started the Doughroller Money Podcast, which has been downloaded millions of times. I've since sold my websites, bought them back, and started a new website and this YouTube channel.

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